If you are close to FI, do you get the jitters?

[travelbug]

Hi
we are close to FI...YAY!!!!
But now that it's close (middle to end of next year) some days I get the jitters and feel that if we just put in another year or two in our business that would give us a bigger buffer.
It's insane!
Our magical figure will keep us very comfortable and we are living a frugal lifestyle and working hard to achieve it all.

But when is enough truly enough. we are still young (ish...LOL) at 36 and 40 currently, so will still work on our terms eventually again I think; that is our make up and we love challenging ourselves and having projects, so money wont be the issue, it's the letting go of that permanent income stream.

Just curious if anyone else felt this way.

C

[tooqk4u22]

Yes - I am still trying to figure it out.  My conservative nature says I need x plus 30% of x at a 3% SWR when general convention is x at 4% SWR (MMM recently did article on this) - like I said I am conservative. 

I am most concerned about generating enough income to support and cover the unexpected (really my biggest concern) and that half of what I have is in retiriement accounts.  The markets are so unpredictable and a simple diversified portfolio smooths this but there is plenty of evidence that if you pull the ripcord at the right or wrong time makes a big difference (i.e. if you have your number hit but and it is while the market is depressed then you will likely be fine). 

That said I think you need some higher yield investments to buffer the SWR like rental properties - but as I have said before it is difficult to make sense of that in my area unless you go to the inner city. 

[igthebold]

I'm not that close, but I had similar jitters when I went out on my own and started a consulting business. It has so fundamentally changed the way I look at making money that I doubt I'll have the same level of jitters when the time comes.

However, I have still never gotten over the idea that I'm somehow defrauding the people I charge money. That's common, too, and I bet similar feelings come up occasionally when you're FI. http://blog.asmartbear.com/self-doubt-fraud.html

[grantmeaname]

Yes - I am still trying to figure it out.  My conservative nature says I need x plus 30% of x at a 3% SWR when general convention is x at 4% SWR (MMM recently did article on this) - like I said I am conservative.

1.3x*.03=.039x withdrawn per year edit:I did the calculation backwards. Arebelspy's got the correct math... d'oh.
x*.04=.04x withdrawn per year

Those two really aren't that different from each other. I doubt a 3.9% SWR is really any safer than a 4% SWR. I can't see how you'd do that with Firecalc, but it's really a miniscule difference.

[tooqk4u22]

Not sure what you are saying but 3% is different than 4% - it is not 3.9% as you see it.  Let's say I need $40K to live on then standard convention is that I need $1.0M. But as I said I am conservative/scared/whatever and feel a 3% SWR is better for my comfor which would mean I would need $1.3M.  Or if I already had $1M then I would need to find a way to live on $30K (3%) to be more secure - might be overdoing it or might not be but there is a lot of time and uncertainty and it is the unknown that I want to protect against. 

[arebelspy]

Yes - I am still trying to figure it out.  My conservative nature says I need x plus 30% of x at a 3% SWR when general convention is x at 4% SWR (MMM recently did article on this) - like I said I am conservative.

1.3x*.03=.039x withdrawn per year
x*.04=.04x withdrawn per year

Those two really aren't that different from each other. I doubt a 3.9% SWR is really any safer than a 4% SWR. I can't see how you'd do that with Firecalc, but it's really a miniscule difference.

Right, except that in all likelihood, he actually only needs x.  The extra 30% is a buffer that will not be spent by saved in case of the unexpected (that's how I read it).  So his SWR will be 2.3% (using a 3% on the higher budget, but then only spending the lower budget).

The correct math on that would be x/(1.3x/.03).

So in actuality he'd have a large cushion.

Or to put some numbers on it.. say he needs 50k.  At a 4% SWR, he'd need 1,250,000.  He instead is planning for 65,000 (30% buffer), and wants a 3% SWR on that, so he'd need 2,166,666.67.  He'll still likely only need that same 50k.  Thus his WR will be 2.3%.

[grantmeaname]

Not sure what you are saying but 3% is different than 4% - it is not 3.9% as you see it.

Sorry, I misunderstood what you were saying. I wasn't arguing that 3% was the same as 4%, and I agree that it is more likely to work out than 4%. I thought you were using a formula that had you withdrawing 3.9%, but my arithmetic was wrong, as arebelspy pointed out, and it's irrelevant anyway as that's not what you were saying.

[travelbug]

Thanks, it's good to know it is a natural state. We pay off the mortgage next week....YAY.... and thensave for 18 months crazily and put the business up for sale after this Christmas. It is a decision whether to keep it all moving for another 12 months, I suppose it will depend on whether the business sells and how much it sells for.
We are on the path for a minimum of 1.2m (if we walk and shut the business down without selling it) , but will be hoping for more like 1.5m+.
We are in Australia and COL is much more than the USA.

BUT

We are also selling up our house, cars, most "stuff" and going travelling for a year or two. Who knows, we may end up in the USA to live. We are totally unsure as yet as to where we will settle.

I am working it all out on 4% but having a buffer of 15kpa. Also, when we travel through Asian/ South American countries we will spend less than when we are in Europe/USA. We intend to slow travel; renting apartments and camping in the Summer.

C

[Tyler]

I definitely know how you feel.

My wife and I are less than 1 year away from a nest egg that will cover a 4% SWR.  Of course, the same spreadsheet-happy engineering personality that made me understand the finances of that milestone also knows that if we only work for one more year after that, we'll be closer to a safer 3% SWR.  And just a little longer, and we can buy a house in cash without depleting our non-retirement savings.  And a year more, and we could have an even nicer home, and......

You get the idea.  What a spreadsheet or retirement calculator usually neglects is that semi/early retirement is not really a financial decision so much as a lifestyle one.  If it was just about money and ultimate security, nobody would ever retire. 

We'll be 35 next year.  When we hit our goal, our current plan is to move to a less expensive area, reclaim our life balance, and take a little time to decompress from the cumulative work of getting to that point.  Then we'll most likely get back to work that is more fulfilling and less stressful than what we do now. 

Especially for young people, I think FI is more about Freedom than Firecalc. 

[darkelenchus]

Especially for young people, I think FI is more about Freedom than Firecalc. 

Well put!

[skyrefuge]

But now that it's close (middle to end of next year)

My wife and I are less than 1 year away from a nest egg that will cover a 4% SWR.

How do you guys measure a number so full of estimates and assumptions with such precision?  I'd think that at best, if I had to point at my FI date on a calendar it would be a vague blob covering at least 3 years, but y'all sound like you'll be able to locate it within a 6-month window.  Is it truly tied to a "magic number", or is it more other life-events that narrow the focus of that blob for you? 

For years, my "FI date" was going to be when I had my mortgage paid off; my net worth would hopefully be somewhere within the range covered by the blob at that point, and the mortgage payoff would give me that artificially precise point at which I could decide to declare FI.  But now that I paid it off 6 years earlier than I was planning, I feel a lot more adrift in knowing what my "FI date" actually is, because now I have *only* that highly-fluctuating and assumption-filled number base my decision on.

I mean, in a one year period of 2008, my net worth dropped 20% (really more like 30% considering that I still pumped $50k into investments that year).  In the next 1 year period, it jumped 36%.  And in the last 12 months, it's increased only 2%, with similar $50k savings/year over all those 12-month periods.  Those big swings are enough to change a 4% SWR into a 3% SWR and vice-versa.  It seems like the only way you could predict your FI date with more precision than a multi-year blob is if your savings rate is so high that it dominates over the noise of market fluctuations.  Like if you save $100k/year and only need a $500k nest-egg; then a 10% fluctuation in the market over a year (up or down, which is pretty standard) would amount to only half of what you're adding.  Working a year less than that would almost surely leave you with too little, and a year longer almost surely with too much.

Another way of putting it is that if I could look backwards from the moment I die, it would be (theoretically) possible to look at my remaining stash and the entire history of my earning and spending and determine the actual day upon which I reached FI.  But trying to predict it now?  I'd be shocked and amazed if I could come with 5 years of the actual date.

Anyway, point is, I say don't bother with any jitters, because if you think you're that close to FI, there's a good chance you've actually reached it already, and the only time you'll ever know for sure is when you're dead, so why worry about it?  :-)

[Tyler]

How do you guys measure a number so full of estimates and assumptions with such precision?  I'd think that at best, if I had to point at my FI date on a calendar it would be a vague blob covering at least 3 years, but y'all sound like you'll be able to locate it within a 6-month window.  Is it truly tied to a "magic number", or is it more other life-events that narrow the focus of that blob for you? 

Good question.  For me, it's a little bit of both hard numbers and life events.

I can estimate our 4% SWR nest egg date relatively accurately for three reasons:

1) I know our estimated monthly expenses quite well via a year's worth of Mint data, spreadsheets that calculate other costs like taxes and health care expenses, and lots of effort studying where we can trim when we pull the trigger.
2) Our savings rate per year is quite high right now and we're already pretty close (we'll reach our goal in a little over a year even with no investment gains).
3) We use the Permanent Portfolio for investments, which provides steady returns (albeit modest compared to stock booms) with minimum volatility.  The chance of losing money on investments over a year's time (even in a poor economy) is reasonably low, and major swings are rare. 

That said, as my wife will attest I've been all over the map after I came to the realization (fairly recently) that FI was actually not only attainable, but also quite close.  Part of me wants to work a few more years to make our finances 100% solid (on paper, at least), while another part wants to pull an Office Space and just not go into work anymore.  ;) 

A 4% SWR is about our minimum for being comfortable making a relatively big life change like downshifting and moving out of the Bay Area (and away from a major job center), while 3% would make me more comfortable from a true early retirement perspective.  I'm sure there will be a grey area when we get to that 4% mark and debate our options (are we really not working for a long period of time, or is there something new that we'd like to try?) but at that point it'll feel more like a choice.  And that's a worthy goal for us.

[travelbug]

"How do you guys measure a number so full of estimates and assumptions with such precision?  I'd think that at best, if I had to point at my FI date on a calendar it would be a vague blob covering at least 3 years, but y'all sound like you'll be able to locate it within a 6-month window.  Is it truly tied to a "magic number", or is it more other life-events that narrow the focus of that blob for you?  "

For us it is when our passive income stream runs higher than our expenses.

For us it's even a bit more complicated as we are going to travel for the world for an unknown period of time into countries we have never been (and many we have visited) and we don't want to have to live on sandwiches and not experience the various cultures while in that country.

BUT; how much is enough? Is any amount ever enough? So we did afew calculation and worked it out researching other travellers experiences via their websites, blogs and email contact with them.

Then we decided how we want to travel, bearing in mind we have two small children who we will be unschooling with us, and found a magic number we would be OK with.

Then we made sure that magic number would allow us to purchase a house in Australia (where house prices are more expensive than most places in the world) and still have enough to live on while not having to work.

That was it for us. I know we will start another business, it's in our blood, but it will be on our terms and if we want to shut it down for afew months to travel we will without hesitation.

I have not factored any of that future income into our equations or any of our high-risk share investments.

So when our numbers hit that magic number that we need we are cool. With no debt and an income from our business I can predict that within a month or two. If we sell our business (which I have not factored in to our number either) we will have more than we originally required.  A nice buffer.

I hope that all makes sense and answers your questions a bit.

C

[tooqk4u22]

How do you guys measure a number so full of estimates and assumptions with such precision?  I'd think that at best, if I had to point at my FI date on a calendar it would be a vague blob covering at least 3 years, but y'all sound like you'll be able to locate it within a 6-month window.  Is it truly tied to a "magic number", or is it more other life-events that narrow the focus of that blob for you? 

As noted above, that is kind of my problem - uncertainty/life events - big family, things can happen. Not sure if I will really feel that I ever have enough because of it.  My FI date is when I have have enough that basic needs are met and then work/generate non-passive income on my terms.

3) We use the Permanent Portfolio for investments, which provides steady returns (albeit modest compared to stock booms) with minimum volatility.  The chance of losing money on investments over a year's time (even in a poor economy) is reasonably low, and major swings are rare. 

PP Historical results have been great but I am not convinced that PP will continue to perform in a same way - way too much reliance on fixed income and hard assets.  PP has benefited from continuously declining interest rates, which really can't fall any further. I think more exposure to equities would be better.

[Tyler]

PP Historical results have been great but I am not convinced that PP will continue to perform in a same way - way too much reliance on fixed income and hard assets.  PP has benefited from continuously declining interest rates, which really can't fall any further. I think more exposure to equities would be better.

I like the PP because it explicitly does not try to predict what asset will do well in the coming years and has done quite well with an agnostic outlook.  But who knows -- perhaps you're right.  I'm not here to evangelize the PP, and there are other good investment methods as well.   Do what makes you most comfortable.

In any case, a portfolio is not cast in concrete. As long as you're not making risky investments, you can always modify it later if something fundamentally changes and it no longer works like it did in the past.  For now, I personally like what I'm doing as it is steady and allows me to stop stressing about stock market swings.